On November 2nd 2020 , the Federal Government announced detailed rules related to the new Canada Emergency Rent Subsidy (“CERS”) program that subsidizes businesses that have experienced a drop in revenues. The subsidy is based on (i) qualifying rent expenses if a renter or (ii) qualifying holding period costs (including interest on mortgage financing) if an owner for periods from September 27th to December 19th 2020.
These rules are very similar to the rules for the revised Canadian Emergency Wage Subsidy program (CEWS 2.0). Note that the CERS is available for periods after December 19 2020 to June 2021 but the rules have not yet been announced.
Base Rent Subsidy:
This subsidy is based on the eligible entity’s revenue reduction percentage (based on Table 2 copied below) for the particular period:
- if the revenue reduction percentage is 70% or more, then the base rent subsidy percentage is 65%,
- if the revenue reduction percentage is between 50% to 70% then the base rent subsidy percentage is 40% + 1.25 X [the rent reduction percentage greater than 50%], and
- if the revenue reduction percentage is less than 50%, the base rent subsidy percentage is 0.8 X the revenue reduction percentage for the period.
- if the revenue drop is 60% then the subsidy rate is 52.5%;
- if the revenue drop is 25% then the subsidy rate is 20%.
Top-up Rent Subsidy:
There is also a top-up rent subsidy of 25% (prorated by the % of time in the period the qualifying property is subject to the “public health restriction”) if:
- the eligible entity is required to cease some or all of its activities (referred to as “restricted activities”) in connection with the qualifying property for at least 1 week as a result of a “public health restriction” made under the laws of Canada in response to the Covid-19 Pandemic; and
- it is reasonable that it will affect at least 25% of the qualifying revenues of the eligible entity and certain other conditions are met.
“Restricted activities” do not include a restriction on the extent to which an activity may be performed or limits placed on the time during which an activity may be performed.
Renters: Qualifying rent expenses for a leased location are capped at $75,000 per period [subject to an overall cap of $300,000 per period which must be shared amongst affiliated entities] and includes all amounts paid to an arm’s length party:
- including gross rent, % rent based on sales, profit or similar criterion, amounts required to be paid under a triple net lease as regular instalments of operating expenses, property taxes and ancillary services;
- excluding interest and penalties payable under the lease and payments for discrete items or special services and CAM reconciliation adjustments; and
- reduced by amounts received from subletting the property
Owners: Qualifying holding period costs are capped at $75,000 per location per period [subject to an overall cap of $300,000 per period which must be shared amongst affiliated entities] and include interest on mortgage or debt obligations secured on the qualifying property (subject to limits) and amounts paid for insurance and property taxes on the qualifying property and is also reduced by amounts received from leasing the property.
Amounts not eligible:
- expenses relating to residential property used by the taxpayer (e.g. a house or cottage)
- payments to non-arm’s length entities
- mortgage interest on property primarily used to earn directly or indirectly rental income from arm’s length entities
Eligibility criteria for the CEWS will generally align with the Canada Emergency Wage Subsidy program. Eligible entities include individuals, taxable corporations and trusts, non-profit organizations and registered charities. Public institutions are generally not eligible for the subsidy. Eligible entities also include the following groups:
- Partnerships that are more than 50% owned by eligible members;
- Indigenous government-owned corporations that are carrying on a business, as well as partnerships where the partners are Indigenous governments and eligible entities;
- Registered Canadian Amateur Athletic Associations;
- Registered Journalism Organizations; and
- Non-public colleges and schools, including institutions that offer specialized services, such as arts schools, driving schools, language schools or flight schools.
The eligible entity must also meet one of the following criteria:
- have a payroll account as of March 15, 2020 or have been using a payroll service provider;
- have a business number as of September 27, 2020; or
- meet other conditions that may be prescribed in the future.
Examples (provided by the Department of Finance):
Matt owns a local chain of three casual dining restaurants. With restrictions on dining room capacity, and patio business declining as cooler weather sets in, his revenues were down 40 per cent in September and 60 per cent in October, compared to the same time last year. Matt incurred $30,000 in eligible rent costs in respect of the first period of the rent subsidy. He will be eligible for a rent subsidy at a rate of 52.5 per cent, for a benefit of $15,750.
MovieCastle Group is a chain of six cinemas. MovieCastle Group fully owns each cinema, which are all incorporated separately. In September, revenues were down 70 per cent, and in October, revenues were down over 80 per cent. MovieCastle Group and its companies incurred rent costs of $600,000 in respect of the period.
Under the rent subsidy, MovieCastle Group will be eligible for a base subsidy rate of 65 per cent on a maximum of $300,000 of rent expenses per period. At each location, only the first $75,000 of rent expenses is eligible for the subsidy. MovieCastle Group members decide to divide the maximum $300,000 for the group equally amongst the six members, and each therefore can claim $50,000 in eligible expenses. The total group benefit will be $195,000 (or 65 per cent of $300,000).
How and when to apply?
- When can we apply? The CRA will announce this shortly;
- Deadline to apply? 180 days after the end of the qualifying period
If you have any questions with respect to the above please give your DMCL Business and Tax Advisor a call.